Almost 3% of IRS workers caught cheating but some slip through cracks

By Andrea Coombes, MarketWatch.com
June 21, 2011, 5:35 p.m. EDT

SAN FRANCISCO (MarketWatch) — The IRS catches almost 3,000 tax scofflaws in its own ranks each year, but some employees still dodge the system, according to a new Treasury Department report.

The Internal Revenue Service’s internal program caught on average about 3,000 incidents of noncompliance on employee tax returns each year from 2004 through 2008 — that’s about 3% of its workforce — but 133 employees who may have violated tax law avoided that program’s net in 2006 and 2007, according to the report from the Treasury Inspector General for Tax Administration, or TIGTA, which monitors the IRS.

The potential violations include failure to file a tax return, filing late, failure to report income and failure to pay taxes due.

While the report found that only a tiny portion of the IRS’s some 107,000 employees (in 2007) slipped through the cracks, TIGTA called on the tax agency to root out any and all workers who may be trying to game the system.

“In the inspector-general community, we have a zero-tolerance policy for any incidence of fraud, waste or abuse,” a TIGTA spokeswoman said.

“As the agency of the federal government whose chief mission is to administer the federal tax system, IRS employees are particularly expected to comply with all tax laws,” the TIGTA report said. “The IRS risks an erosion of public confidence in the American voluntary tax system if it does not appropriately address employees who are not complying with their tax obligations.”

For its part, the IRS said in a statement that it imposes harsh penalties for tax fraud within its ranks. “Ensuring that IRS employees comply with the tax law is a top priority for the IRS… Employees who are judged to have willful tax-compliance problems are terminated, in addition to other potential sanctions.”

Also, the IRS said that it investigated the 133 problem cases and most did not constitute fraud. “In 44% of the cases, employees filed a tax return late but were due a refund. And over half the cases have already been reviewed and closed because the facts did not merit further review. We are analyzing the rest of the cases, and if there are problems they will be addressed,” the IRS said.

Inside job

While the scope of the problem appears to be small, examples of IRS workers committing fraud are not hard to find. An IRS agent in Santa Clarita, Calif., in May was sentenced to three years in prison for filing fraudulent returns “for himself and innocent relatives that claimed, among other things, bogus deductions for alimony and mortgage payments,” according to a U.S. Justice Department release.
In April, a part-time data-entry clerk at an IRS office in Fresno, Calif., was charged with filing false tax returns and committing wire fraud and identity theft after allegedly stealing 68 tax returns from an IRS office, filing fraudulent returns using taxpayers’ personal information and claiming excessive federal tax withholding, presumably to generate tax refunds.

Separately, another IRS employee in Fresno in April pleaded guilty to filing false income-tax returns in the names of her husband, who was in state prison at the time, and other prisoners. The tax returns claimed federal tax withholding on wages the prisoners had never earned, to generate tax refunds. The IRS issued tax refunds totaling more than $13,000 based on the false returns, according to Justice Department statement.

And a separate TIGTA report in 2009 found that 128 IRS employees claimed the first-time home-buyer tax credit, even though they might not have been eligible. TIGTA simply identifies potential problems that require further investigation by the IRS.

Andrea Coombes is MarketWatch’s personal finance editor, based in San Francisco.